Although oil prices have largely stabilised over the last month or so, there is still an enormous level of uncertainty regarding the outlook for the resource.
In January, Brent oil and West Texas Intermediate (WTI) oil prices both bottomed out just above US$40 a barrel down more than 60% from June 2014. At the time, the price spread between the two was roughly US$1.50. Almost two months later, that spread has widened to more than US$10 a barrel (its largest gap in two years) with Brent crude trading at US$59.73 a barrel while WTI is stuck trading at US$49.61 a barrel.
The different behaviours being displayed are reflective of the conflicting outlooks in the market for the resource itself. While some analysts believe prices could be on their way back up, possibly towards US$100 a barrel, others remain more cautious, suggesting prices have further to fall.
Indeed, either argument is more than justifiable. While the United States record inventory level is clearly a concern, especially considering that several hundred rigs drilling for oil in the United States have been closed in recent months, other experts are focused more on an increase in demand which could come from areas of Europe and Asia.
It is this high level of uncertainty that makes Australia's energy sector so dangerous right now. While stocks could soar if a sustainable rise in energy prices does eventuate, they could also be hammered if prices fall any further. In fact, even a 1.2% fall overnight was enough to send a strong ripple through the sector. Here's how some of the energy stocks are reacting today:
- BHP Billiton Limited (ASX:BHP) down 1.6%
- Woodside Petroleum Limited (ASX: WPL) down 1.4%
- Santos Ltd (ASX: STO) down 3.8%
- Sundance Energy Australia Ltd (ASX: SEA) down 4.3%
- Origin Energy Ltd (ASX: ORG) down 2.5%
- Liquefied Natural Gas Ltd (ASX: LNG) down 6%
Investors need to recognise the enormous level of risk entering the energy sector right now, no matter how tempting some of the share prices may seem. Until that high level of volatility subsides, investors would be wise to avoid the industry altogether and focus on some of the market's safer and more promising opportunities.
